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Modest U.S. Growth at Year’s End May Reframe Policy Debate Modest U.S. Growth at Year’s End May Reframe Policy Debate
(35 minutes later)
The American economy finished 2016 on a soft note, the government reported Friday, lowering the annual pace of growth to 1.6 percent, the lowest level in five years. The American economy finished 2016 on a soft note, the government reported on Friday, lowering the annual pace of growth to 1.6 percent, the lowest level in five years.
That is less than half the rate President Trump vowed he could deliver during the campaign — a promise repeated on the White House website — and the economy’s underlying lack of momentum complicates the new administration’s plans.That is less than half the rate President Trump vowed he could deliver during the campaign — a promise repeated on the White House website — and the economy’s underlying lack of momentum complicates the new administration’s plans.
Indeed, it underscores why analysts say Mr. Trump’s growth rate target of 4 percent is audacious at best, fanciful at worst, especially given the 2 percent or so growth that has prevailed since the current recovery began in 2009. Last year’s increase in output also represented a drop from the 2.6 percent rate recorded in 2015. Indeed, it underscores why analysts say that Mr. Trump’s growth rate target of 4 percent is audacious at best, fanciful at worst, especially given the 2 percent or so growth that has prevailed since the current recovery began in 2009. Last year’s increase in output also represented a drop from the 2.6 percent rate recorded in 2015.
What is more, although the Commerce Department report covered the last three full months of President Obama’s second term, anemic economic activity could add to the revenue shortfall the federal government will likely face from the personal and corporate tax cuts Mr. Trump has discussed. What is more, although the Commerce Department report covered the last three full months of President Barack Obama’s second term, anemic economic activity could add to the revenue shortfall the federal government will most likely face from the personal and corporate tax cuts Mr. Trump has discussed.
“It’s difficult to see how we would get to 4 percent growth given the current structure of the economy, especially demographics and productivity growth,” said Gus Faucher, deputy chief economist at PNC Financial Services in Pittsburgh. “That would be true no matter who is the president.”“It’s difficult to see how we would get to 4 percent growth given the current structure of the economy, especially demographics and productivity growth,” said Gus Faucher, deputy chief economist at PNC Financial Services in Pittsburgh. “That would be true no matter who is the president.”
The retirement of the baby boomers will hold back any expansion of the labor force, he said, while productivity gains from technology are not expected to accelerate from the current level, as they did with consumer adoption of the internet or mobile phones in the 1990s.The retirement of the baby boomers will hold back any expansion of the labor force, he said, while productivity gains from technology are not expected to accelerate from the current level, as they did with consumer adoption of the internet or mobile phones in the 1990s.
On the other hand, weak growth does strengthen arguments for a federal program to fortify the nation’s infrastructure — an effort Mr. Trump has advocated and which could provide an economic stimulus.On the other hand, weak growth does strengthen arguments for a federal program to fortify the nation’s infrastructure — an effort Mr. Trump has advocated and which could provide an economic stimulus.
And it is sure to be invoked to validate his fundamental campaign argument: That whatever the decline in the official unemployment rate, the economy has been underperforming in a way that demands new policies. And it is sure to be invoked to validate his fundamental campaign argument: that despite the decline in the official unemployment rate and the resurgent stock market, the economy has been underperforming in a way that demands new policies.
Still, there are some familiar economic headwinds the new administration will have to confront. The strengthening dollar could further hurt American exports and worsen the trade balance, a major factor in the weakness in the fourth quarter.Still, there are some familiar economic headwinds the new administration will have to confront. The strengthening dollar could further hurt American exports and worsen the trade balance, a major factor in the weakness in the fourth quarter.
At the same time, the Federal Reserve has signaled that it is ready to raise interest rates a few times this year, and a faster rate of expansion would only accelerate the Fed’s plan to tighten monetary policy in head off inflation.At the same time, the Federal Reserve has signaled that it is ready to raise interest rates a few times this year, and a faster rate of expansion would only accelerate the Fed’s plan to tighten monetary policy in head off inflation.
For the fourth quarter alone, the economy expanded at an annual rate of 1.9 percent. Experts had expected growth of just over 2 percent. The Commerce Department will make two revisions of the figure over the next two months that could change the number.For the fourth quarter alone, the economy expanded at an annual rate of 1.9 percent. Experts had expected growth of just over 2 percent. The Commerce Department will make two revisions of the figure over the next two months that could change the number.
The data was complicated this time by the aftereffects of a surge in soybean exports in the third quarter, which lifted growth in the period to the highest level in three years.The data was complicated this time by the aftereffects of a surge in soybean exports in the third quarter, which lifted growth in the period to the highest level in three years.
Since the surprise victory of Mr. Trump in November, many economists have been raising their projected growth rates for the latter half of 2017 and for 2018.Since the surprise victory of Mr. Trump in November, many economists have been raising their projected growth rates for the latter half of 2017 and for 2018.
That is not necessarily because they feel Mr. Trump policies will prove beneficial in the long run. Instead, it is because two of his proposals — tax cuts and infrastructure investments — could bolster the economy in the short term.That is not necessarily because they feel Mr. Trump policies will prove beneficial in the long run. Instead, it is because two of his proposals — tax cuts and infrastructure investments — could bolster the economy in the short term.
Mr. Faucher lifted his growth forecast to 2.4 percent in 2017 and 2.7 percent in 2018. Previously, he expected output to expand by 2.25 percent in each year.Mr. Faucher lifted his growth forecast to 2.4 percent in 2017 and 2.7 percent in 2018. Previously, he expected output to expand by 2.25 percent in each year.
“Tax cuts and infrastructure spending represent a much more expansionary fiscal policy than we’ve had in some time,” he said.“Tax cuts and infrastructure spending represent a much more expansionary fiscal policy than we’ve had in some time,” he said.
But Mr. Faucher cautioned that increasing the federal deficit, which stood at $587 billion in 2016, by hundreds of billions more in the coming years could increase interest rates, which were already moving higher.But Mr. Faucher cautioned that increasing the federal deficit, which stood at $587 billion in 2016, by hundreds of billions more in the coming years could increase interest rates, which were already moving higher.
The rates, including mortgage rates for home buyers, were already up more than half a percentage point since the election, on expectations of more borrowing and faster growth.The rates, including mortgage rates for home buyers, were already up more than half a percentage point since the election, on expectations of more borrowing and faster growth.
But in economics, as in life, everything cuts both ways. The rise in interest rates has also strengthened the dollar relative to other currencies.But in economics, as in life, everything cuts both ways. The rise in interest rates has also strengthened the dollar relative to other currencies.
While that has been good news for American tourists, a stronger currency is bad news for American exporters, especially manufacturers, because it makes imports cheaper while lifting the price of American-made products overseas.While that has been good news for American tourists, a stronger currency is bad news for American exporters, especially manufacturers, because it makes imports cheaper while lifting the price of American-made products overseas.
“Mr. Trump can’t control the dollar, and that will be a big factor this year,” Mr. Faucher said. “Trade is likely to be a drag on growth.”“Mr. Trump can’t control the dollar, and that will be a big factor this year,” Mr. Faucher said. “Trade is likely to be a drag on growth.”